2021/22 Budget: New taxes will deepen burden on tax payers

A customer uses a visa card to complete a transaction online. Online businesses will have to incur more costs due to the new 12 per cent levy on data  bundles in the next financial year. PHOTO/ FILE

What you need to know:

Tax burden. Beginning July 01, Internet users, motorists and consumers of both alcoholic and non-alcoholic beverages will be required to dig deeper into their pockets to fund the national budget’s expenditure after Parliament on April 30th endorsed a range of government’s proposed taxes in a frantic move to raise revenue to fund its expenditure.

The two arms of government—the Executive and Parliament, should be more mindful about their actions, particularly when dealing with touchy issues of taxation, given its implication on the cost of doing business, the economy and livelihoods.

Tax experts, public policy analysts and top economists in the country all cautioned the two arms of government against rushing to pronounce themselves on matters related to tax measures that are not thoroughly researched.

Normally, the outcome of ‘half-baked’ policies makes the honourable member look dishonourable in the eyes of the already burdened tax payers. 

According to a recent study facilitated by Mr Albert Beine, a renowned tax expert in the country, to assess the sentiments of the population pertaining to the tax proposals that the Parliament passed on the last day of last month, the findings indicate that the tax payers are unhappy with the entire arrangement, describing it as “hollow, regressive and burdensome.”        

To beat the deadline, on the last day of April, Members of Parliament rushed to pass a raft of tax proposals presented to them by the executive. 

According to the government, the new taxes will boost the struggling economy being battered by the Covid-19 pandemic and its containment measures, a position that is disputed in some quarters, including by a large section of private sector players.

Endorsed proposals

Beginning July 01, Internet users, motorists and consumers of both alcoholic and non-alcoholic beverages will be required to dig deeper into their pockets to fund the national budget’s expenditure after Parliament on the last day of last month (April 30th) endorsed a range of government’s proposed taxes in a frantic move to raise revenue to fund its expenditure, some of which are wasted while others continue to remain questionable.

Under the Excise Duty Amendment Bill, 2021, that was endorsed by Parliament, Internet users will have to dig deep into their pockets to pay a 12 per cent levy on Internet bundles, even after the tax proposal was strongly opposed by the private sector let alone the civil society organisations.

One of the argument fronted against this proposal that replaces the much-criticised Over-The –Top (OTT) tax for social media access, was that it is counter-productive especially now when the population is being encouraged to embrace “the new normal” which means making use of digital spaces to transact business.

As it has been the case over the years, motorists will pay an additional Shs100 in tax per litre of petrol and diesel. Already, government is collecting Shs1,350 per litre of petrol in taxes and Shs1,030 in revenue per litre.

For those who celebrated when Parliament threw out the Traffic and Road Safety Act (Amendment) Bill, 2021, it was short-lived. This is because the fuel tax that is expected to fetch an additional Shs196 billion, in many ways compensates for annual road licence fee of Shs200,000 per motor vehicle and the Shs50,000 per motorcycle which the legislators believe they scrapped.

Worth noting is there is nothing stopping fuel dealers and petrol station owners from increasing pump prices as a way of handing down the extra cost to the consumers as they have always done. 

 “Doubting Thomas”

Government’s assumption that the Shs100 increase on the fuel pump price will not distort the cost at which the final consumer purchases fuel is wrong, according to transporters. It is such view based on what the transport sector players describe as a result of shallow research that makes taxpayers to become sceptical of many tax proposals and measures fronted by the executive arm of government and endorsed by parliament-the other arm of parliament.

Save for the government’s penchant to overburden tax payers, it is not yet clear why tax on data bundles was passed despite opposition across several quarters.

This comes nearly a year after OTT which was largely opposed by the population failed to deliver on the anticipated revenues.

According to Zuriat Nakayenga, a senior tax advisor, the justification to introduce the Shs200 social media tax was that the government needed money to further develop infrastructure in rural areas. Three years down the road, the Government which had projected to collect revenue worth Shs284b from social media by 2019, was only able to register Shs49.9b which is just 17.4 per cent of the annual projected revenue.

Nakayenga argues that the tax will make consumption of internet data quite expensive for an economy that is in the process of recovering from the economic crisis created by the Covid-19 strict measures and lockdown imposition on non-essential activities. 

“The likely incidence of tax in circumstances of a tax on internet data would be the final consumer with telecommunication companies being at liberty to transfer a bigger percentage of the burden of the tax to the end user,” she says.

From the passed Bills, including Fish (Amendment) Bill 2021, Stamp Duty (Amendment) Bill 2021, External Trade (Amendment) Bill 2021 and Mining  (Amendment) Bill 2021, in addition to excise duty levied on fermented beverages that include cider, perry, mead, pears or near beer, is expected to generate at about Shs400 billion or slightly more.

Tax base challenge

The challenge, however, is that on paper, the tax proposals look good, but practically they may not be enforceable. 

“On paper it appears as if the proposals will expand the tax base, but how realistic are they when put in practice?” the managing director, Global Taxation Services Ltd, Mr Albert Beine said in an interview last week.

Mr Beine notes that normally the amount government estimates is never realised. They are more of ‘trial and error’ proposals.”

“There is need for thorough research so that our tax laws can stand the test of time. We are seeing tax measures passed into law and changed before the ink that signs it into law dries up.”

According to Mr Beine, who is also an experienced tax expert, government is fond of looking at quick fixes to raise revenue without minding about the implications on tax payers.

“I facilitated a regional consultative meeting in Gulu, Soroti, Jinja, Kampala and Mbarara, finding views of people about these very tax proposals and they were not happy with them. They said it was about quick fixes without minding how the population is affected,” Mr Beine revealed.     

Rental tax

All landlords will pay rental tax at same rate of 30 per cent. 

The Bill proposes to increase the rental income tax rate for individuals from 20 per cent to 30 per cent, similar to that of non-individuals.

Considering the above proposed change on limitation of rental expenses for both individuals and non-individuals, this change will result in the same tax regime for all rental taxpayers. This proposal puts individual and non-individual landlords on an equal footing, imposing an effective tax rate of 12 per cent on gross rental income (that is, taxing 40 per cent of the rental income at a rate of 30 per cent).

Cement prices to rise

Value Added Tax on clinker - a key ingredient in making cement, has been reinstated, meaning cement production will become more expensive.

This exemption was introduced in 2018. So, expect the bag of cement to rise unless the manufacturers absorb the added cost and do not pass it on to the consumer.

Way forward

Domestic revenue is projected to increase by 16 per cent from Shs19.3 trillion in FY 2020/21 to Shs22.4 trillion in the coming financial year 2021/22. However, over the years, Uganda’s domestic revenue to GDP ratio has been stagnated between 12.5 and 13 per cent which is lower than the Sub-Saharan Africa average of 17 per cent.

Massive revenue leakages, some of which being perpetuated by multinational companies continue affecting the country’s ability to collect enough domestic revenue.   

For government to raise enough revenue, Mr John Walugembe, the executive director, Federation of Small and Medium Sized Enterprises, says tax measures should stimulate the economy for the SMEs.

The current proposals, however, according to Mr Walugembe have not changed for the better. In fact, they have remained as they were before Covid-19 struck.

“Nothing serious has changed in terms of tax proposals compared to the previous financial years. If you look at the revised budget for the 2021/2022 Financial Year, the Shs44 trillion budget is so closed to the Shs45 trillion budget for the previous year. So the difference is almost negligible,” says Mr Walugembe in a sideline interview of a CSO pre-budget dialogue on the national budget FY 2021/22.

He continued: “Despite our misgivings, as the SME federation we are expecting the budget to resuscitate SMES, considering that 60 per cent of it will be expenses in procurement budgets. That is where we want the SMEs to be considered most or else the economy will remain in hibernation for another 12 months.”

Mr Walugembe argued that SMEs in sectors such as ICT, agro-industrialisation and manufacturing should be deliberately supported through the budget to succeed, stressing that that is the only way the economy can be resuscitated on the back of several regressive tax proposals, among them the tax on data bundles. 

For Mr Julius Mukunda, the executive director of Civil Society Budget Advocacy Group (CSBAG), apart from the tax on data bundles proposal and the laxity by the executive to implement the budget to its logical conclusion, some of the proposals including taxing fish maw and penetrating extractive sector in terms of having it on the taxman radar, are steps in the right direction.

He would also like to see enforcement and expansion of Digital Tax Stamps and Electronic fiscal receipting and invoicing solution should be expedited.  

Regressive taxes      

According to a recent study facilitated by Mr Albert Beine, a renowned tax expert in the country, to assess the sentiments of the population pertaining to the tax proposals that the Parliament passed on the last day of last month, the findings indicate that the tax payers are unhappy with the entire arrangement, describing it as “hollow, regressive and burdensome.”        

Beginning July 01, Internet users, motorists and consumers of both alcoholic and non-alcoholic beverages will be required to dig deeper into their pockets to fund the national budget’s expenditure after Parliament on April 30 endorsed a range of government’s proposed taxes in a frantic move to raise revenue to fund its expenditure, some of which are wasted while others continue to remain questionable.